“Let’s keep our fingers crossed the new law passes, I said in “Bankruptcy And Foreclosure – And The Walls Come Tumbling Down”. I was referring to the bill Senator Dick Durbin just reintroduced in the Senate, the Helping Families Save Their Homes In Bankruptcy Act. I explained that, although foreclosure and bankruptcy are related, they have been totally separate legal issues. In other words, the law now does not allow bankruptcy to change or modify the terms of a first mortgage.
Many commentators put a large part of the blame for our mortgage crisis on the 2005 changes to bankruptcy law. Before the law changed, critics point out, households could erase unsecured debt by filing Chapter 7 bankruptcy, freeing up income to make mortgage payments. By forcing many households to file bankruptcy under Chapter 13 debt repayment plans, many more cash-strapped homeowners were forced into foreclosure.
As the debate continues about the best “fix” for the mortgage crisis, I’m seeing greater numbers of people in my Indiana bankruptcy law offices who are being forced into foreclosure than at any time during my almost twenty five years in practice. Helping clients find a compromise with mortgage lenders is one of the services I’ve always provided my Indiana bankruptcy clients, but now I’m dealing with more “mods” (mortgage modifications). While, overall, lenders are more willing to discuss modifications, often it’s a case of “too little, too late” for the homeowner. From the lender’s point of view, as a WHTR-TV news story explained, “the average home foreclosure results in the loss of 55% of the balance for the owner of the mortgage”, and sometimes lenders come out ahead of that with a “mod”.
Senator Durbin, in his speech reintroducing the bill, points out the program would cost taxpayers nothing. Opposition to the bill is led by the Mortgage Bankers Association, claiming mortgage interest rates would rise for all borrowers if lenders were forced to take on greater risk.
If the new law passes, what will be accomplished is to allow the bankruptcy process to change the terms of a mortgage (that was entered into before the bill’s passage), so that more homeowners could afford the payments and keep their homes. Changes could include extending the repayment period for as long as forty years, and changing subprime and adjustable interest rates to match conventional loan rates.
As a Certified Consumer Bankruptcy Specialist, I’m hoping a compromise can be reached that will allow judges to alter mortgage terms where needed, and that the bankruptcy system can play a very positive role in helping Americans stay in their homes!